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Commercial Law Practitioner 1996, 3(7), 178-180

Commercial Law Practitioner

1996

THE LEGAL REQUIREMENTS FOR THE ESTABLISHMENT OF A PARTNERSHIP

UNDER IRISH LAW

MICHAEL J. TWOMEY*

Subject: Partnerships

Keywords: Ireland; Partnerships;

The requirements to be satisfied in order to establish a partnership are set out in section 1(1) of the
Partnership Act 1890.1 Section 1(1) of the 1980 Act provides as follows: “Partnership is the relation
which subsists between persons carrying on a business in common with a view of profit.” This article
examines these require-ments as they apply under Irish law.
APPLICATION OF SECTION 1(1) OF THE PARTNERSHIP ACT 1890 IN IRELAND
By virtue of Article 73 of the 1922 Constitution and subsequently by Article 50.1 of the 1937
Constitution, the provisions of the Partnership Act 1890 continued in full force and effect in
Ireland after the establishment of Saorstát Éireann,2 subject only to certain modifications required
by the terms of the Adaptation of Enactments Act 1922. The first Irish case after 1922 to consider
the 1890 Act was Murphy v. Power. 3 In this case the Chancery Division of the Irish High Court
accepted without argument that the terms of the Partnership Act 1890 applied to Saorstát
Éireann.

The definition of partnership in section 1(1) of the 1890 Act can be divided into three
requirements which need to be satisfied in order for the relationship of partnership to exist,
namely that:

1.
a relationship exists between persons;

2.
those persons are carrying on business in common; and

3.
they are doing so with a view to profit.

These three requirements will be examined in turn.

Persons
(i)
Number of Parties to the Partnership
It is clear from the use of the plural form of the word “person” and it also is implicit in the
decisions of the Irish courts4 that before a partnership can exist there must be at least two
“persons”.
(ii)
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Position of Members of a Company

Certain relationships between persons which satisfy the three criteria for partnerships are
excluded from constituting partnerships by section 1(2) of the Partnership Act 1890. Section
1(2)(a) and 1(2)(b) provide that:

“The relation between members of any company or association which is-

registered as a company under the Companies Act 1862, or any other Act of Parliament for the
time being in force and relating to the registration of joint stock companies; or

formed or incorporated by or in pursuance of any other Act of Parliament or letters patent or

royal charter

is not a partnership within the meaning of this Act.”5

As this section was drafted with only English Acts of Parliament in mind, the question to be
addressed under Irish law is whether section 1(2)(a) would apply to members of companies
formed under the Companies Act 1963 and whether section 1(2)(b) would apply to members of
companies or associations formed under other Acts of the Oireachtas.

As regards section 1(2)(a), section 5(4) of the Adaptation of Enactments Act 1922 provides that
the term “Act of Parliament” as used in British Statutes6 shall mean and include either an Act of
the British Parliament or an Act of the Oireachtas, as the case may require. Since the Companies
Act 1963 also satisfies the requirement insection 1(2)(a) that it be an act relating to the
registration of joint stock companies, 7 the relation between members of a company formed under
the 1963 Act will not constitute a partnership.

As regards section 1(2)(b), by virtue of section 5(4) of the Adaptation of Enactments Act 1922 this
section must also be interpreted as referring to Acts of the Oireachtas. Therefore, a partnership is
not constituted by the relation between members of companies or associations formed or
incorporated under Acts of the Oireachtas such as Bórd Gáls,8 Irish building societies, 9 industrial
and provident societies 10 and friendly societies. 11

(iii) Corporate Partners While intra-company relationships are therefore prevented by section 1(2)
of the 1890 Act from constituting partnerships, it is not clear from the definition of section 1(1)
whether inter-company relationships may constitute a partnership. However, section 19 of the
Interpretation Act 188912 clarifies this point by providing that where the word “persons” is used in
an Act passed after the commencement of that Act 13 it is deemed to include any body of persons
corporate or unincorporate, unless the contrary intention appears. For this reason, it is clear that
the relationship between companies or the relationship between companies and individuals may
constitute a partnership under Irish law. 14

Carrying on Business in Common

This journal may be cited as e.g. (2010) 17 C.L.P. 1 [(year) (Volume number) C.L.P. (page
number)]
15
It is this part of section 1(1) which has received most attention in the Irish courts. In analysing
whether the parties to a purported partnership satisfy this requirement, the Irish courts have
expressly adopted the statement of Lord Lindley in his book on the Law of Partnership 16 that:

“The main rule to be observed in determining the existence of a partnership, a rule which has
been recognised ever since the case of Cox v. Hickman (1860) 8 H.L.C. 268 is that regard
must be paid to the true contract and the intention of the parties as appearing from the whole
facts of the case."17

A secondary rule18 to be used in determining the existence of a partnership is contained within

the terms of section 2(3) of the Partnership Act 1890. This rule which has been explicitly relied
upon by the Irish courts, 19 provides that:
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“The receipt by a person of a share of the profits of a business is prima facie evidence that
he is a partner in the business, but the receipt of such a share, or of a payment contingent
on or varying with the profits of a business, does not of itself make him a partner in the
business.”

The first Irish case to consider the requirement that the purported partners be “carrying on
business in common” was Macken v. Revenue Commissioners.20 This case concerned an oral
agreement between Mr. Macken, his daughter and his son whereby Mr Macken agreed to admit
his daughter and son as partners into his painting business, which up to then he had operated as
a sole trader. This oral agreement dealt with such matters as the proportions in which profits,
losses, assets and liabilities were to be shared and the trading name of the firm. Seven months
after the oral agreement, the three parties executed a partnership agreement and soon after Mr.
Macken died. His daughter claimed that a partnership came into existence between all three
parties on the date of the oral agreement. However, the High Court held that the oral agreement
was simply an agreement to enter partnership at a future date and that the partnership did not
commence at this time since the father did not begin to carry on business in common with his
daughter and son until the execution of the partnership agreement. While the profits of the
business were in fact shared between the three parties for the seven month period between the
oral agreement and the written agreement, Teevan J., in apparent reliance on section 2(3) of the
1890 Act noted that this was not of crucial importance. Despite the fact that the Inspector of
Taxes in assessing income tax treated the three parties as partners, Teevan J. held that the
parties did not satisfy the requirement that they be carrying on business in common. In reaching
this conclusion he considered the following factors as crucial:

The bank accounts of the sole trader had not changed.

Notices had not been issued to those parties who had been contracting with the sole trader to
advise them of the change.

No transfer of debts from the sole trader to the partnership had taken place.

No registration in the Register of Business Names21 had been effected.

The business name of the firm had not been changed.

In this case the High Court also expressly followed the English case of Waddington v.
O’Callaghan22 in holding that the partnership agreement, although stated to be of retrospective
effect, created a partnership on the date of its execution since no business was carried on in
common by the parties prior to that date.

It is often the case that the question of whether business is being carried on in common arises
where the court is asked to determine whether the relationship under review is that of an
employer/employee or that of two or more partners. This was the case in the Director of Public
Prosecutions v. McLoughlin.23 This case examined the legal relationship between the skipper of a
fishing trawler and his five crew members. The skipper and the crew participated in regular
fishing expeditions although no member of the crew was paid a wage for the services rendered
but remuneration was agreed after the end of each voyage and was based solely on the value of
the catch. The remuneration of each crew member was determined by both custom and by the
crew members in consultation with the skipper. The crew members were not required to
contribute to any loss that may have been sustained on a voyage. If there was no profit on the
catch the crew received no money but the skipper sometimes dispersed “subs” to crew members
in particular financial difficulties and these subs were treated in the nature of advances against
future shares of the profits. The High Court noted that under section 2(3) of the 1890 Act the
sharing of the profits was prima facie evidence of partnership. Although the losses of the
business were not shared, the High Court held that the relationship between the skipper and the
crew was not that of employer/employee but it was a partnership. The reasons given by the High
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Court for reaching its decision were:

Each weekly voyage was a separate venture and no crew member had a contract which entitled
him to take part in a subsequent voyage.

The crew member was not paid wages but became entitled to a share in the net profits.

Most importantly, (in Costello J.’s view) the skipper did not himself determine the rate of
remuneration. This was determined partly by custom, partly by agreement between the crew
themselves in consultation with the skipper.

Another case which considered the issue of whether parties are carrying on business in common
is that of O’Kelly v. Darragh.24 This case concerned two doctors involved in a centre which
provided testing and analysis services to drug companies. The plaintiff supervised the day to day
running of the business whilst the defendant played no active part in that regard. The plaintiff and
the defendant divided the profits of the business equally between them, although O’Hanlon J.
noted that under section 2(3) of the 1890 Act this did not of itself make the relationship a
partnership. O’Hanlon J. gave a shortened version of Lord Lindley’s main rule when he stated
that in order to determine whether a partnership exists the “terms of the arrangement between
the parties must fairly be considered as a whole”. 25

On this basis he noted that while the plaintiff was a co-signatory on the bank account of the
business:

he was not involved in or responsible for getting funds for the continued operation of the
business;

he was not involved in going out to get contract work for the business;

there had never been a discussion of a partnership between the plaintiff and defendant; and

there had never been a discussion of whether the plaintiff would have any personal liability if the
contract work did not make a profit.

For these reasons he held that the plaintiff, although entitled to a share of the profits of the
business, was entitled to them not as a partner but as an employee.

With a View to Profit

The requirement that the relationship between the parties be one which has a view to profit was
considered in MacCarthaigh v. Daly.26 In this case the respondent entered into the purported
partnership in order to acquire a share of the losses of the partnership which he proposed to set
off against his individual income tax. The leasing agreements entered into by the partnership
were completely uneconomical and had the effect of producing a substantial loss for the
partnership. In the High Court, O’Hanlon J. expressed considerable reservations as to whether
the arrangements satisfied the requirement in section 1(1) of the 1890 Act that the business be
carried on with a “view of profit”. For procedural reasons 27 O’Hanlon J. was constrained from
overturning the finding of fact of the appeal commissioners on this issue. However, because of
the absence of the “view of profit”, it is clear from his judgment that if he was not so constrained
he would have held that the arrangement did not constitute a partnership under Irish law.

CONCLUSION
Of the three requirements for partnership, it is perhaps most difficult to predict what the attitude of
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an Irish court in a particular case will be to the requirement that the persons are “carrying on
business in common”. On the basis of the Macken, McLoughlin and Darragh cases it is clear that
the presence or indeed absence of (i) an oral agreement; (ii) the sharing of profits; or (iii) the
sharing of losses is not conclusive in determining whether or not the parties are carrying on
business in common. Indeed, these cases indicate that in determining the existence of a
partnership, Lord Lindley’s main rule continues to apply in Ireland so that each case must be
decided on its own facts and in light of the surrounding circumstances.

This journal may be cited as e.g. (2010) 17 C.L.P. 1 [(year) (Volume number) C.L.P. (page number)]

Commercial Law Practitioner 1996, 3(7), 178-180

*. Michael J. Twomey is a solicitor with A & L Goodbody.

1. 53 & 54 Vict. c. 39.

2. Subject to the terms of the Partnership Act 1890 not being inconsistent with the terms of either the 1922 or the 1937 Constitution.

3. [1923] 1 I.R. 68.

4. All of the reported decisions of the Irish courts have concerned at least two parties.

5. Section 1(2)(c) excludes from partnership the relation between members of a company engaged in working mines within and subject to
the jurisdiction of the Stannaries of Devon and Cornwall. Accordingly, this is of little relevance to Ireland and indeed the Stannaries
jurisdiction no longer exists in England since the Companies Consolidation (Consequential Provisions) Act 1985,s.28.

6. This term includes the Partnership Act 1890 since a British State is defined by s.20 of the Adaptation of Enactments Act 1922 as
meaning an Act of the Parliament of the late United Kingdom of Great Britain and Ireland which was on December 6, 1922, in force in the
area now comprised in Saorstát Éireann.

7. C.f. Keane, Company Law in the Republic of Ireland, (2nd ed., 1991) para. 2.03 in which he notes that “the name joint stock company
is still sometimes used to describe the limited liability company of today”.

8. Established under the Gas Acts 1976-1993.

9. Formed under the Building Societies Act 1976.

10. Registered under the Industrial and Provident Societies Acts 1893–1978.

11. Registered under the Friendly Societies Acts 1896–1977, although because of their objects these societies are likely to fail to satisfy
the third requirement of partnership. See below.

12. (52 & 53 Vict. C.63) and also carried over into the laws of Saorstát Éireann by Article 73 of the 1922 Constitution. The equivalent
provision in s.11 of the Interpretation Act 1937 only applies to Acts of the Oireachtas.

13. The Interpretation Act 1889 commenced onJanuary 1, 1890 and the Partnership Act 1890 was passed onAugust 14, 1890.

14. See, for example, McCarthaigh v. Daly

[1986] I.L.R.M. 116 where the High Court held that a partnership existed between a limited company and seven individuals. The
possibility of corporate partners is also implicit in s.3 of the Registration of Business Names Act 1963 which requires the partners in a firm
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who are carrying on business under a name, other than the surname or corporate name of the partners, to register that name as a
business name.

15. Section 45 of the Partnership Act 1890 defines business in a non-exhaustive manner by providing that “business” includes every
trade, occupation or profession.

16. Lindley on Partnership (14th ed., 1979) at p. 70.

17. Adopted by Costello J. in DPP v. McLoughlin

[1986] I.R. 355 at 360.

18. Section 2 of the Partnership Act 1890 contains a number of more specific rules for determining partnership. It is not proposed to
consider these rules in this article.

19. E.g. O’Kelly v. Darragh

[1988] I.L.R.M. 309. See below.

20. [1962] I.R. 302

21. Under the Registration of Business Names Act 1963 a partnership which is carrying on business under a name other than the names
of all the partners must register that name within one month of the adoption of that name.

22. (1931) 16 T.C. 187

23. [1986] I.R. 355

24. [1988] I.L.R.M. 309

25. [1988] I.L.R.M. at page 317

26. [1986] I.L.R.M. 116. This case appears to be the only reported case in Ireland or in the United Kingdom dealing with a failure to
register as a limited partnership under the Limited Partnerships Act 1907 (7. Edw. 7). Under s.5 of that Act this failure results in the limited
partnership being deemed to be a general partnership.

27. The appeal to the High Court was from a decision of the Appeal Commissioners by way of case stated. Accordingly, O’Hanlon J.
relied on the case of James Mara v. Hummingbird
[1982] I.L.R.M. 421 to hold that the findings on primary facts (in the instant case that the relationship was a partnership) should not be set
aside unless there was no evidence whatever to support them.

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